Question

A company has an EBIT of $3,715 in perpetuity. The unlevered cost of capital is 14.30%,...

A company has an EBIT of $3,715 in perpetuity. The unlevered cost of capital is 14.30%, and there are 20,570 common shares outstanding. The company is considering issuing $8,160 in new bonds at par to add financial leverage. The proceeds of the debt issue will be used to repurchase equity. The YTM of the new debt is 9.45% and the tax rate is 26%. What is the weighted average cost of capital after the restructuring?

Question 12 options:

12.56%

12.88%

13.20%

13.52%

13.84%
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Homework Answers

Answer #1
WACC after restructuring
Value of Unlevered firm =
EBIT*(1-Tax)/Re(levered)
EBIT = 3715
Tax rate = 26%
Re = 14.30%
Value of UnLevered firm = 19224.48
Value of levered firm = 21346.08
19224.48*+8160
Debt to borrow = 8160
YTM on debt = 9.45%
RE = 14.3%+(14.3%-9.45%)*(8160/(21346.08-8160)*(1-26%)
16.52%
Computation of WACC
Source Weight Cost WACC
Debt 38.23% 6.99% 2.67%
equity 61.77% 16.52% 10.21%
12.88%
answer = 12.88%
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